Beta Co-efficient As A Measure Of Risk Of The Common Shares Listed At The Nairobi Stock Exchange

Abstract

The Markowitz portfolio model (1952) derives the expected rate of return for the portfolio of assets and a measure of its expected risk. This expected risk may be divided into systematic risk (market risk) and unsystematic risk (individual risk) Market risk has been a controversial area in the financial management doctrine. This paper examines to what extent market risk as measured by relating returns of individual securities to returns of the market is a useful indicator in analyzing risk characteristics of firms quoted at the NSE. From all the companies quoted at the stock market for the period between 22nd March 1996 and 31st December 1999, data on share price, bonus issues and dividends was collected from published report and figures from the Nairobi Stock Exchange database. This secondary data was analyzed using regression analysis (Minitab Statistical Package). The information is in two categories: Market return weighted using market capitalization (the product of number of shares in issue and asset return) and Market return not weighted. Statistical tests were applied on the information using the t-test for a population of fifty, a 5% level of significance and two degrees of freedom. The test accepted companies with a value over 1.8. This helped to attain the objective of th-e .study, which was whether the beta coefficients of securities traded at the NSE have information content, and also systematic risk is a major factor in this market. The results of the analysis indicated that 74% of the companies (using market return not weighted) have a beta that is statistically significant and only KPLC has a statistically significant alpha. When the market return is weighted 56% of the companies have a tratio (beta) greater than 1.8 thus being statistically significant. The study will have value particularly to investor in the Nairobi stock Exchange that are concerned with the degree of market risk involved in the stock of any quoted company.